Kuntal Shah is the founding partner of Oaklane Capital Management.
A value-oriented investor, he possesses an in-depth understanding of value investing with a focus on risk identification and mitigation, emerging trends, and opportunities.
During the Morningstar Investment Conference in 2017, he chatted with Ramesh Damani. An excerpt is presented below.
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You are best known for bottom-up stock picking. Can you share more on that?
There are three legs to our investment process.
One is about finding the right business, second is the right management and third is at the right price. The market rewards patience and you periodically get – like see demonetization had introduced a shock, which allowed me to buy almost five stocks, which met my first criteria, but didn't meet my last criteria. So, I think, it's all about patience for waiting for the right price because future returns are a function of price you pay right now.
After the business and the pedigree of management, I think the third most important factor is valuation. I think the quality of the business and the quality of management precedes valuation.
If you look at a company like a footwear company, okay, now it's traditionally been designed by Government of India to be a small-scale industry. The largest footwear company in India, which has 120 crore population has a sale of 2,500 crore. Now, can you visualize 10 years down the line once the consolidation of industry, as it formulizes, as it starts paying taxes, will improve, it's a no-brainer. The trick is to figure out who is going to deliver those results.
What if these industries go away to, say, Taiwan?
I think the cost of capital is falling for India also. The value migration is not in manufacturing, it is in branding, it is in servicing. Adidas is selling the same T-shirt at some $50, $60, while the cost of production is $0.33. So, I don't think that's the most determinant proportion of value chain in the whole system. So, getting the product right, the branding right, the price point right, so it's a combination of a various factors.
You once said: “Longevity of growth, plus high return, plus reasonable price equals wealth creation.” With business changing so rapidly, are you getting caught in perhaps the formula that worked in the 60s? Where is the longevity of growth in a business with the technology cycle kicking in?
Product adaption cycles are shrinking. Longevity of the growth is not something that can be taken for granted. At the same time, we are moving towards a situation where the winner takes it all. So, the competitive advantage period is diminishing, but the size of value creation during that competitive period is far outstripping what we have seen ever in our lifetime because of the conversions of various technologies which have come. So, it's a trade-off between the two.
To identify the longevity in my business assessment, we follow market share. Market shares once taken are more lasting and more pervasive than any of the metrics you can see through. And if you see that the momentum is visible on unit economics; the momentum is visible on the customer adaption; and the momentum is visible even on the digital side. So, when you combine all three, the market share metrics is a very important indication.
How do you personally view technology? Is it a friend or a foe in making investing decisions or for corporates?
India is not the cutting-edge leading innovator of technology on most of the fronts. We are more or less an adaptor, an importer of technology in the sense that whenever we see lot of capital chasing in India, it's all ME2 platforms ME2 business models imported from the more developed economies.
My sense is that in a listed market, there is a huge advantage of following the companies which are more technologically amenable to adaption and executing it so well that they gain the market share. So, if you look at companies like D-Mart or Bajaj Finance or – they've been using technology which has been created by somebody else to their advantage to reduce the friction time, to reduce the turnaround time, to increase the convenience, there are – the technology has multiple roles and usage to play.
You want to find companies that are using technology upfront?
They are mostly beneficiaries of the technologies where the incremental technology is available to them at very negligible cost. Like cloud computing, today the cost is just too negligible. Delivery, the costs are shrinking rapidly. So, they are actually benefiting from the technology. It's enabling them to get market share from the incompetent players.
Technology is disrupting many industries. Amazon and Apple are getting into so many industries and disrupting them. Does technology disrupt the financial industry also you feel at some point?
I think that the financial industry is riddled with a lot of friction cost and inconvenience-related aspects. And I think that it's right for disruption due to technology and I'll give you just few examples to illustrate the point.
Look at the asset management industry. An asset management industry has actually three core functions. The front office for customer acquisition where digital tools of acquiring customer, keeping customer informed, allowing decision-makings are changing the landscape.
Second is the middle office, where offshoots of technologists like bitcoin, which is blockchain, will make a lot of asset management, NAV accounting, custodial services and so on so forth seamless and reduced the cost.
Third is the decision-making where again you are witnessing abroad a trend towards indexing, ETFs and so on and so forth.
In first two, it's formal; it's beneficial to the customer. But in the last case, if everybody moves towards indexing, the biggest allocation of capital will be done by the guy deciding the index stocks and not by the invisible hand of the capital which you know invariably drives. So, a situation will arise where you will be able to game the indexing that you buy the companies which are just about to enter the index and the role of capital allocation has to be driven based on the hard science. It can't be fully automated to that extent. There is some amount of subjectivity to it.
Do you see technology as a friend or a fad according to you? Which technologies you see as a threat? Is online a threat to you? Is bitcoin a threat to you? What do you see as a threat to your investee companies?
Human progress has all been about technology and productivity-linked thing. So, subject to the demographic dividends being paid off in India through right skilling and resolution of inequity, which exist in the Indian population, I think that technology can be a great leveler and can enhance the productivity subject to the caveats of the skilling being addressed. And I think that we will be leapfrogging a lot of past problems which other economies have gone through. We are seeing it in mobile revolution already. We see it in transportation also.
